Paul Graham just posted one of his articles called “Founder Control”. I was eager to write this post, because as I have said before, the real rock star founders are the ones that can keep control of their company after their VC Series A. T he hall of fame founders are the ones that can keep majority after the second VC round or Series B.

Paul says it wasn’t common 10 years ago, and  I kind of agree, but it shouldn’t matter. Founders staying in control is key for the most successful companies. Founders are the key principles and they should be the ones who either make it work or screw it up. Either way, the founders are the key.

Paul makes some good points. He writes:

Mark Zuckerberg kept control of Facebook’s board through the series A and still has it today. Mark Pincus has kept control of Zynga’s too. But are these just outliers? How common is it for founders to keep control after an A round?

I feel like we’re at a tipping point here.  A lot of VCs still act as if founders retaining board control after a series A is unheard-of.  A lot of them try to make you feel bad if you even ask—as if you’re a noob or a control freak for wanting such a thing.

Founders retaining control after a series A is clearly heard-of. And barring financial catastrophe, I think in the coming year it will become the norm.

Control of a company is a more complicated matter than simply outvoting other parties in board meetings.  Investors usually get vetos over certain big decisions, such as selling the company, regardless of how many board seats they have, and board votes are rarely split.  Matters are decided in the discussion preceding the vote, not in the vote itself, which is usually unanimous. But if opinion is divided in such discussions, the side that knows it would lose in a vote will tend to be less insistent. That’s what board control means in practice. You don’t simply get to do whatever you want; the board still has to act in the interest of the shareholders; but if you have a majority of board seats, then your opinion about what’s in the interest of the shareholders will tend to prevail.

So while board control is not total control, it’s not imaginary either. There’s inevitably a difference in how things feel within the company. Which means if it becomes the norm for founders to retain board control after a series A, that will change the way things feel in the whole startup world.

The switch to the new norm may be surprisingly fast, because the startups that can retain control tend to be the best ones. They’re the ones that set the trends, both for other startups and for VCs.

A lot of the reason VCs are harsh when negotiating with startups is that they’re embarrassed to go back to their partners looking like they got beaten. When they sign a termsheet, they want to be able to brag about the good terms they got. A lot of them don’t care that much personally about whether founders keep board control. They just don’t want to seem like they had to make concessions. Which means if letting the founders keep control stops being perceived as a concession, it will rapidly become much more common.

Like a lot of changes that have been forced on VCs, this change won’t turn out to be as big a problem as they might think. VCs will still be able to convince; they just won’t be able to compel. And the startups where they have to resort to compulsion are not the ones that matter anyway. VCs make most of their money from a few big hits, and those aren’t them.

Knowing that founders will keep control of the board may even help VCs pick better. If they know they can’t fire the founders, they’ll have to choose founders they can trust. And that’s who they should have been choosing all along.

Founders Should Be The Rock Stars Not The VCs

The faster the market moves, the more the founder needs to be in charge. Finding a founder with vision, product skill, and deal making ability is ideal. Venture capitalists need to let the founder run the ship. If VCs run interference with the founder then the entire venture slows down. Building a startup from nothing is difficult and navigating the market landscape with imperfect information is key. Entrepreneurs are good at dealing with ambiguities.

Once a venture enters the market, the venture plan has to be in a constant state of reinvention to ‘hit’ the tipping point for the preferred business model for the proverbial ‘big opportunity’. One thing that is often overlooked is the important objective of getting the new venture in a position in the market to seize the growth opportunity contemplated by the entrepreneur and the investor.

Entrepreneurs and VCs need to deal with change as a positive, not a negative.  If the ventures position in a growing market is good, then the change is a normal characteristic. To me, it’s about letting the founder stay in control until the venture hits calmer waters. Founders know best in the early stages. Creative, product, sales, and deal making skills matters the most. VCs shouldn’t just replace founders because a few waves crash on the ship.